Summary of Issues for the Fifth Northwest Power Plan

The Council is beginning development of its fifth power plan. As required by the
Northwest Power Act, the Fifth Northwest Power Plan will incorporate 20-year forecasts
of demand for electricity, assess resource strategies to meet those demands at the lowest
cost to the region and make recommendations for implementing those strategies. The
development of a new power plan also provides the Council with the opportunity and the
responsibility to address important issues that can affect the achievement of the Acts dual
goals of an adequate, efficient, economic and reliable power supply and protection,
mitigation and enhancement of the fish and wildlife resources of the Columbia River
Basin. Through the process of developing the plan, the Council hopes to engage the
region on these issues and influence their resolution in ways that are beneficial to the
region. The purpose of this paper is to discuss the issues we intend to address in the plan
and to seek public comment on them.
The Act requires a 20-year time frame, calling explicitly for 20-year forecasts of demands
and of the resources required to meet those demands. While this time frame was largely a
result of the long lead-time, highly capital-intensive resources and fully regulated
electricity markets of the 1970s, there remain important longer-term issues affecting the
objectives of the Northwest Regional Power Act. Given the relatively short-term focus of
the current electricity market, the Council is one of the few organizations able to take a
long-term perspective.
That said, the reality of much shorter lead-time, lower capital-cost resources and more
competitive electricity markets leads to a shorter-term focus. This shorter-term focus
cannot be ignored. Moreover, we believe there are a number of important issues that will
have to be addressed over the next five to seven years. Consequently, we plan to focus
much of our attention on the initial five to seven years of the 20-year, 2002 2021
planning horizon.
The experience of the past year and a half, with its extremely high and volatile prices, the
threat of blackouts, and the need to resort to emergency hydropower operations suggests
that electricity markets in the West are not functioning as efficiently and effectively as
most market participants would desire. While there are many factors that contributed to
this situation, electricity market structure is a significant one. That structure might be
termed a mixed market. By a mixed market, we mean that the wholesale and retail
parts of the market are not directly connected for most consumers within the region, or
for that matter, in the rest of the West. The wholesale power market is a loosely regulated
competitive market in which prices are determined through market transactions, and
the development of new resources is largely undertaken by private developers responding
to market signals. Those signals are typically a combination of spot market prices and
the prices that can be negotiated for longer-term bilateral contracts. In the retail market,
most customers are buying from regulated utilities, either regulated by state commissions
February 6, 2002

or local governing bodies. Retail rates are generally established in rate proceedings that
lag the wholesale market. Rate structures generally do not provide real time signals of
the current value of power. While there are some retail customers who are directly
exposed to market signals, they are, for the most part, larger customers, and this situation
is by no means universal even for them.
For many reasons, we think this general structure will persist for at least the next five to
seven years. We think it is unlikely that states in the region will move farther down the
road to retail competition beyond those steps already taken, and there is some possibility
that some steps toward retail competition will be reversed. On the other hand, we think it
is unlikely that there will be any significant reversal of national policy encouraging
wholesale competition. As a practical matter, the important issue is not restructuring
power markets in any overall sense. It is, we think, seeking improvements within this
mixed market structure that will allow it to function more efficiently and effectively. We
recognize that many utilities and others in the region feel they are fully occupied in
dealing with the aftereffects of high power prices and other consequences of the recent
electricity crisis. However, if we fail to address these issues over the next few years, the
chances of a repeat of the power supply and price problems experienced over the last year
are greatly increased.
Addressing the problems of the current market structure would benefit the Councils fish
and wildlife responsibilities as well. As we saw this year, severe shortages in the
electricity market can also affect the regions ability to achieve its fish and wildlife
mitigation goals.
Some of the issues raised by the current market structure and other issues that we think
should be addressed in the Fifth Northwest Conservation and Electric Power Plan
include:

Incentives for Development of Generation -- The current market structure

appears to have failed to provide adequate and timely incentives for adding new
capacity to ensure power supply adequacy and to moderate price volatility. The
Council proposes to assess existing incentives and disincentives for development
of new generation and examine options available to encourage development that
will moderate potential supply-demand imbalances and price volatility. Options
will be analyzed to determine their effect on prices, system cost, adequacy and
reliability. If appropriate, the plan may recommend measures to address
systematic problems or improve signals for market development.

Increasing the Price Responsiveness of Demand -- Most analyses of the 20002001 electricity situation agree that the lack of a demand response to wholesale
prices worsened supply problems and price volatility. The Council proposes to
evaluate alternatives for increasing the price responsiveness of demand. The
analysis would address the effects of various mechanisms on system cost,
reliability and prices. If appropriate, the plan may make recommendations for
implementing measures to improve the price responsiveness of demand.

February 6, 2002

Sustaining Economically Efficient Investment in Efficiency -- Over the past

several years, investment in energy efficiency has followed a roller coaster
pattern investment at below cost-effective levels when market prices were low
followed by crash programs when prices exploded. The Council proposes to
assess the strengths and weaknesses of different approaches to achieving
economically efficient levels of investment in energy efficiency in a more volatile
electricity market and, if appropriate, suggest ways in which these programs
might be improved.

Information Requirements for Assessing Power Supply Adequacy and

Market Performance -- The 2000-2001 electricity situation highlighted the need
for timely information for assessing both power supply adequacy and reliability,
and market performance. Some information that used to be readily available is
now closely held. The Council proposes to evaluate the data needed to perform
its planning and market assessment functions, and to investigate and make
recommendations on how best to obtain such data if it is not currently available.

Fish Operations and Power -- During the 2000-2001 electricity crisis, tradeoffs
were made between hydro operations for fish and operations for power. These
tradeoffs were important in maintaining an adequate power supply but came at
some cost to the survival of juvenile salmon and steelhead. If many of the issues
described above can be successfully resolved, the power system should be better
able to provide the operations desired for fish even in low water years or times of
financial crisis while the region also enjoys a more reliable power system. The
Council s 2002 mainstem amendments to the Fish and Wildlife Program are
intended to lead to river operations that provide for both fish recovery and
enhancement and an adequate, efficient, economical and reliable power system.
However, conflicts are likely to always exist. There remain incentives to deviate
from prescribed fish operations when supplies are tight and prices soar. The
Council proposes to investigate operational strategies and potential incentives to
minimize impacts on fish recovery from deviations from prescribed fish
operations and the options available to mitigate these impacts.

Transmission and an Adequate, Efficient, Economic and Reliable Power

System Transmission policy and planning have become even more critical to
the goal of an adequate, efficient, economic and reliable power system since the
restructuring of the electricity industry to achieve functional separation of
transmission and generation. The issue is how the mix of independent power
developers, transmission owners, load serving entities, and consumers make
coherent decisions about what to build and where to build it in a vast
interconnected system. How these decisions are made can have a significant
effect on power system costs, reliability, and the environment. While many of the
issues are being addressed in the RTO West process, it will be some time before
the Regional Transmission Operation (RTO) is in place if ever. In the meantime,
Bonneville and others will be making decisions about transmission policy and

February 6, 2002

planning. Consequently, the Council proposes to address alternatives with respect

transmission pricing, planning, and policy as they affect the Councils mission of
an adequate, efficient, economical and reliable power system.

Value of and Barriers to Resource Diversity -- The new generation that is under
construction or in the development process in the region is heavily weighted
toward natural gas-fueled combustion turbine technologies. Some observers have
raised the concern that the Northwest and, even more so, the West Coast, is
becoming overly dependent on natural gas and that the region should strive to
increase the diversity of resources being added to the system. The Council
proposes to assess the benefits of resource diversity and the potential barriers to
increasing it. These include the issues associated with integrating intermittent
resources into the system and pricing, transmission and distribution system issues
raised by alternative resources and distributed resources. The plan will evaluate
the prospects for achieving benefits from diversity, intermittent resources and
distributed generation. We will attempt to identify barriers to the achievement of
benefits and assess approaches to resolving the issues.

Future Role and Obligations of the Bonneville Power Administration -- The

Bonneville Power Administration is legally obligated to serve the loads placed on
it by public agencies at cost, even if it must acquire additional resources to do so.
Many believe that in a competitive wholesale power market, this obligation
exposes the Northwest to some risk of losing continued preferential access to the
output of the Federal Columbia River Power System (FCRPS). In addition, it
distorts the market for new resources both from the standpoint of Bonnevilles
large presence in the market and the price signals sent to its customers. However,
if Bonneville were unable to acquire additional resources, some means of
allocating its existing resources among competing interests would have to be
found. There are currently discussions ongoing among different customer groups
that are focused on the question of allocation of existing Bonneville power in the
post-2006 rate period and to some degree Bonnevilles role in resource
acquisition. If these discussions bear fruit, the Council would analyze the
proposal or proposals to develop the pros and cons with respect to resource
development, power system adequacy, reliability, cost, market dynamics and the
ability of the region to retain the benefits of the federal system. The purpose of
this analysis would be to help the public and regional leaders reach decisions
about the appropriateness of the proposals. In the absence of such proposals, the
plan will evaluate alternative roles and practices for Bonneville and develop as
fully as possible the pros and cons associated with the alternatives.

Global Climate Change Risks to the Power System -- A preponderance of

scientific opinion asserts that the earth is warming and that this warming is largely
the result of increased production of carbon dioxide and other greenhouse gasses
due to human activities. Because of the widespread use of fossil fuels to produce
electricity, the electric power industry is a principal contributor to the growing
atmospheric concentration of carbon dioxide and will be affected by any

February 6, 2002

initiatives to reduce carbon emissions. Furthermore, the production of electricity

from hydropower, so important in the Northwest, may be affected by climate
change if historical precipitation patterns change. The Council proposes to review
the status of the global climate change issue, including the current understanding
of possible effects on the Northwest hydropower system, the effects of possible
greenhouse gas emissions control policies on the relative cost-effectiveness of
resources available to the Northwest, and the value of strategies to address climate
change impacts.
While these issues have been presented as discrete, many are clearly highly interrelated.
The plan will analyze these interrelationships. Further discussion of these issues is
provided in the issue paper Issues for the Fifth Northwest Power Plan, document 2002-1.
This issue paper may be viewed on the Councils website at
http://www.nwcouncil.org/library/2002/2002-01.pdf
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February 6, 2002